Back in 2018, Nicolas Hulot, the former French Minister of Ecological Transition and Solidarity, introduced the Hydrogen Deployment Plan for Energy Transition. This roadmap consists of 18 measures to help companies as well as the overall energy and industrial ecosystem to evolve and reach the objective of 32% of final energy consumption coming from renewable energy by 2030.
Hydrogen being at the center of attention resulted in the drafting of this plan, which many believe could drive the energy transition. Since then, a growing interest in hydrogen solutions has been identified from both public and private sectors.
Hydrogen, the most abundantly present element in the universe, is also plentiful on the surface of the Earth. Its presence is usually bound to other elements such as oxygen and carbon under other forms. Hydrogen rarely exists in its pure state; therefore, its production remains one of the main current challenges. Hence, as promising as the Hydrogen shift is, a thorough analysis of the potential challenges could give us more insight about its complexity and risks.
Hydrogen, a wonderful opportunity …
As stated above, the main challenge in using hydrogen as an energy source consists in its exploitation. In order to extract hydrogen from primary resources such as water or hydrocarbons, energy is required to "break" the hydrogen bonds with other atoms. Hydrogen is an energy vector, not primary energy: it must be produced and stored before being used. In the future, it could play a key role in the energy transition by mitigating the problems of fluctuating electricity production from intermittent renewable energies (solar and wind). Hydrogen combustion does not produce CO2 or any other greenhouse gas; it is a clean, sustainable energy vector, and an effective way to store energy – especially if it is green hydrogen.
According to the Hydrogen Deployment Plan for the Energy Transition, hydrogen’s global market is currently estimated at 60 Mt. According to Straits Research’s Green Hydrogen report, its global market size was estimated at USD 1 billion in 2021 and should be growing at the fast pace of 55% Compound Annual Growth Rate (CAGR) to reach 72 billion in 2030. Driven by the potential growth of the market, several similar estimations were made regarding the electrolyzer and power generation segments, both estimated at around 55% CAGR.
Through the Hydrogen Roadmap Europe report written in 2019, the European Union declared that hydrogen is required for the European Energy Transition and could account for 24% of final energy demand by 2050.
Hydrogen is seen as one of the only solutions of at-scale decarbonization in high-consuming markets and in particular activities such as the transportation sector, gas grid optimization or direct usage as a feedstock or a reductant in industrial processes. Besides that, hydrogen may become a suitable solution to improve the flexibility in transferring energy from one sector to another and to reduce inequalities between regions producing energy and regions in demand as well as in seasonal imbalance.
Hydrogen’s potential has caught the eyes of many countries resulting in a race to launching new facilities and infrastructures. In the past few years, several laws have been voted to incentivize companies investing in this sector. As mentioned above, France has already started creating a stimulating environment for hydrogen, framed by the European Union’s decisions promoting this transition to all of its members.
The United States of America joined the competition this summer as well. In August 2022, Joe Biden signed the Inflation Reduction Act with various tax credit measures enhancing USA’s capacity to tackle hydrogen’s market. Among the sectors and actions benefitting from tax credits, we can find all types of initiatives linked to production and investment in green energy (with a focus on hydrogen) as well as clean-vehicle innovation.This signature took place several months after China officially released a plan to place hydrogen at the center of its national emissions ambitions.
Boosted by National and European regulations and the given opportunities, the market trend shift seems to have accelerated. Benefitting from technological and regulatory momentum, companies such as Air Liquide, Fluxys, TotalEnergies or Engie are to jump into the soon-to-be very competitive market of Hydrogen production, transportation, and storage.
… clouded by many challenges
As hydrogen is described as one energy source capable to slow the anthropization of Earth and reduce the climate change consequences, one can wonder why this shift is only at its starting point. A combination of multiple reasons leads to this consequence: high investments and financial support structures are needed, current processes need to be optimized to produce green (or pink) hydrogen and overall value-chain infrastructure from production to storage needs to be developed.
1. Producing Hydrogen can be controversial
Hydrogen being often classified as a green energy raises many questions. Indeed, if we narrow our vision to the sole use of Hydrogen, one must admit that it does not produce CO2 or any other greenhouse gas. Nonetheless, as described earlier, Hydrogen is not primary energy and needs to be produced from a former state.
Therefore, to be considered as green energy and efficiently tackle energy’s critical issues, hydrogen’s production and storage must not leave a carbon footprint. To produce and generate hydrogen, the use of a chemical process known as electrolysis is needed. This method uses an electrical current to separate the hydrogen from the oxygen in water. That being said, if this electricity is obtained from renewable sources, the hydrogen is considered green. According to IFP Energies Nouvelles, nowadays, 95% of hydrogen is produced with the use of fossil fuels (oil, natural gas, and coal), hence emitting greenhouse gas.
The main challenge for the hydrogen industry is to reduce the cost of producing decarbonated hydrogen, which is currently three times higher than hydrogen produced from fossil fuels. In the short-term, green hydrogen costs fluctuate between €2.5 and €6 per kilogram of dihydrogen. To drastically bring the price down, the industry must first come up with solutions lowering the cost of electrolyzers.
According to Bloomberg New Energy Finance, if renewable (and nuclear) energy costs and electrolyzer purchase prices continue to fall, the hydrogen’s production cost could fall down to $0.70 to $1.60 per kg in most parts of the world by 2050. In 2021, one of the world's leading pure player in electrolyzers, has defined an achievable hydrogen cost target of $1.50/kg. They estimate that the cost of producing green hydrogen could reach fossil parity by 2025.
To complete this cost-based vision, the final delivered energy needs to be assessed to provide a fair comparison. According to RMI, hydrogen possesses one main advantage: its energy density. 1 kg of hydrogen is equivalent to 33.6 kWh of usable energy per kg whereas diesel is able to provide 12-14 kWh per kg. In better words, to reach hydrogen’s usable energy per kg, a gallon of diesel should be used. In September 2022, the price of a gallon of diesel was $4.99 leaving room for hydrogen to establish themselves in a competitive market. Technological innovations and the cost of electricity will play a decisive role in the success of this green revolution.
2. Betting on hydrogen will require many billions of euros to achieve the objectives set …
Achieving the green transition with the help of hydrogen requires the deployment of significant resources, particularly financial ones. According to the European Central Bank, the amount of investment needed over the coming decades is expected to run into the hundreds of billions of euros. Undoubtedly, this challenge will be tackled thanks to the public support, and the full force of the financial sector and industrial players.
In July 2020, A European hydrogen strategy was adopted to reach a carbon neutral Europe and 23 member states of the European Union signed a manifesto for the development of a hydrogen value chain. The European Commission wants to support the emergence of a renewable or low-carbon hydrogen infrastructure that is competitive with fossil hydrogen and a challenging market.
The EU has for instance detailed its hydrogen strategy: it aims to install six gigawatts of electrolyzer capacity by 2024, scaling up to a total of 40 gigawatts by 2030. For this, Europe will need to invest a cumulative amount of €24-42 billion in electrolyzers alone by 2030. Another target of this strategy is to adapt end-use sectors to hydrogen consumption and hydrogen-based fuels, which will also involve significant investments. For instance, €160-200 million are needed to convert a typical EU steel installation coming to its end-of-life to hydrogen. In the road transport sector, to reach the 400 small-scale hydrogen refueling stations (compared to 100 today), an investment of €850-1000 million would be expected.
From production to storage, the creation of an optimized and efficient infrastructure requires massive investments. One may wonder how Europe plans on investing these amounts to sustain the Hydrogen market growth.
3. … as well as several incentives and a clear regulatory framework to boost innovation and new technological development.
In parallel with the challenging investments the European Union needs to leverage, another issue arises in the private sector. Access to finance for early-stage innovators is constrained, in particular for the demonstration of new technologies. This difficulty could be the result of the lack of economies of scale, lack of storage and high production costs. Investors also lament the lack of a mature hydrogen financing ecosystem. Project proponents rely on public support but lack awareness of financing options. The European Central Bank also recommends improving the conditions of access to financing for hydrogen project leaders through tax measures. In France, a tax incentive scheme has been created with the CIR (Crédit d’Impôt Recherche, equivalent of the Research Tax Credits system in the United States), allowing innovative companies to finance up to 30% of their R&D expenses in the form of a tax refund or reduction. Such mechanisms do not yet exist at the European level.
Creating several regulatory frameworks along the whole value chain would give credibility to the EU long-term strategy and ultimately enhance investor confidence to allow more of the much-needed funds to flow towards green hydrogen production and technology innovation.
What about the economic impact ?
As described previously, many big actors of the Energy and Industrial sectors have already started to position themselves in the Hydrogen markets lured by the significant profits they could achieve if the predicted growth turns into reality.
However, the impact will not be only limited to these companies. Energy is a significant factor in every corner of activities through different forms. A shift towards hydrogen in the energy market will inevitably generate a change. One of the first sectors we often link to this topic, and which attracts a great deal of attention lately, is the automotive sector. Internal projects to face potential changes and market challenges are already launched or ready to be launched not to miss any potential calling.
Overall, our society as we know it today is going to face major changes regarding energy production and inevitably energy consumption. To support this transition, a full ecosystem need to be redesigned from supply chain upheavals, emergence of new diplomatic energy alliances to Schumpeter’s creative destructive concept application to the job market.
This will translate in a deep need for understanding and analysis of the situation, as well as solid support in project management to handle uncertainty and risks in most companies. At AION Consulting, we trust our expertise in the Energy and Industrial sectors to answer their needs and help them navigate through these times of transformations.
Hydrogen Roadmap Europe: A sustainable pathway for the European Energy Transition, European Union & FCH, February 2019).